Biggest challenge for U.S. ethanol is big supply

CHICAGO (Reuters) - The biggest challenge facing the U.S. corn-ethanol industry in 2008 will be finding a home for all the new production that is coming on stream, a leading economist with Purdue University said on Tuesday.

"We're going to be in a bind over the short run. Over the long haul with more E85, more stations, more cars it will play out, but in '08 it's going to be tight," Professor Wallace Tyner, who specializes in energy and agricultural policies, told the Reuters Global Agricultural and Biofuels Summit in an interview.

U.S. corn-based ethanol production capacity was a little over 7 billion gallons in 2007. By July, another 5 billion gallons of capacity will come on stream and by the end of the year another billion in capacity was planned, bringing the capacity to 13 billion gallons, according to industry estimates.

Tyner says the maximum amount of domestic ethanol that can be sold in 2008 is 12 billion gallons given the E10 blended fuel market, 10 percent ethanol-gasoline blend and a much smaller E85 market.

There are only about 1,530 stations across the United States that sell the fuel that is up to 85 percent ethanol and annual consumption is around 50 million gallons.

Even the 12-billion-gallon ethanol use figure is optimistic as it assumes nearly all of the U.S. 140-billion-gallon-gasoline market is blended with ethanol at 10 percent, he added.

"If that's the technical max you can sell and you're producing 12-13 billion, then something has got to give," Tyner said. "Either we produce less than capacity, which is likely, or there will be price pressure on ethanol, which is likely, or some combination."

Already, ethanol prices have softened during the fall of 2007, tracking a seasonal slide in the gasoline market after the summer driving season. That decline contrasted with the red-hot crude oil market -- rising to an all-time high of over $100 a barrel this month -- driven by geopolitical concerns.

"You can't expand the domestic market beyond that 11 to 12 billion gallons. If we were able to export it, that would take some of the pressure off," he added.

Tyner said it was difficult to predict how long it would take for ethanol demand to catch up with the supply.

"By the end of '08 will be at 13 billion gallons of capacity. I don't think the E85 market is growing that fast. It's still going to be a problem in '09," Tyner said.

(Editing by Christian Wiessner)